Research

Research papers

Abstract: Using data on house sales and inventories, this paper shows that sales volume is driven mainly by listings and less so by transaction speed, thus the decision to move house is key to understanding sales volume. The paper builds a model where moving house is essentially an investment in match quality, implying that moving depends on variables such as interest rates and taxes. The endogeneity of moving means there is a cleansing effect - those at the bottom of the match quality distribution move first - which generates overshooting in aggregate variables. The model is applied to the 1995-2004 housing market boom.

Abstract: This paper presents a theory of political specialization in which some countries uphold the rule of law while others consciously choose not to do so, even though they are ex ante identical. This is borne out of two key insights: for incumbents in each country, (i) the first steps to the rule of law have the greatest private cost, and (ii) steps taken by some countries in the direction of the rule of law make it less attractive for others to follow the same path. The world equilibrium features a symbiotic relationship between despotic and rule-of-law economies: by producing technology-intensive goods that require protection of property rights, rule-of-law economies raise the relative price of natural resources and increase incentives for despotism in other countries; while the choice of despotism entails a positive externality because cheap oil makes the rule of law more attractive elsewhere in the world.

Abstract: The rule of law requires restraints on the powerful, but how can those be imposed if there is no-one above them? This paper studies equilibrium rules allocating power and resources established by self-interested incumbents under the threat of rebellions from inside and outside the group in power. Commitment to uphold individuals' rights can only be achieved if power is not as concentrated as incumbents would like it to be, ex post. Power sharing endogenously enables incumbents to commit to otherwise time-inconsistent laws by ensuring more people receive rents under the status quo, and thus want to defend it.

Abstract: For many households borrowing is possible only by accepting a financial contract that specifies a fixed repayment stream. However, the future income that will repay this debt is uncertain, so risk can be inefficiently distributed. This paper shows that when debt contracts are written in terms of money, a monetary policy of nominal GDP targeting improves the functioning of financial markets. By insulating households' nominal incomes from aggregate real shocks, this policy effectively achieves risk sharing by stabilizing the ratio of debt to income. The paper also shows that when there is price stickiness, the objective of improving risk sharing should still receive considerable weight in the conduct of monetary policy relative to stabilizing inflation.

Abstract: A striking fact about pricing is the prevalence of "sales": large temporary price cuts followed by
prices returning exactly to their former levels. This paper builds a macroeconomic model with a rationale for sales based
on firms facing customers with different price sensitivities. Even if firms can adjust sales without cost, monetary policy
has large real effects owing to sales being strategic substitutes: a firm's incentive to have a sale is decreasing in the
number of other firms having sales. Thus the flexibility seen in individual prices due to sales does not translate into
flexibility of the aggregate price level.

Abstract: Empirical evidence suggests that inflation determination is not purely forward looking, but models of
price setting have struggled to rationalize this finding without directly assuming backward-looking pricing rules for firms.
This paper shows that intrinsic inflation persistence can be explained with no deviation from optimizing, forward-looking
behaviour if prices that have remained fixed for longer are more likely to be changed than those set recently. A
relationship between the probability of price adjustment and the duration of a price spell is shown to imply a simple
"hybrid" Phillips curve including lagged and expected inflation, which is estimated using macroeconomic data.

Abstract: This paper analyses optimal monetary policy in response to shocks using a model that avoids making
specific assumptions about the stickiness of prices, and thus the nature of the Phillips curve. Nonetheless, certain robust
features of the optimal monetary policy commitment are found. The optimal policy rule is a flexible inflation target which
is adhered to in the short run without any accommodation of structural inflation persistence, that is, inflation which it
is costly to eliminate. The target is also made more stringent when it has been missed in the past. With discretion on the
other hand, the target is loosened to accommodate fully any structural inflation persistence, and any past deviations from
the inflation target are ignored. These results apply to a wide range of price stickiness models because the market failure
which the policymaker should aim to mitigate arises from imperfect competition, not from price stickiness itself.

Abstract: There is much evidence that price-adjustment frequencies vary widely across industries. This paper shows
that inflation persistence is lower with heterogeneity in price stickiness than without it, taking as given the degree of
persistence in variables affecting inflation. Differences in the frequency of price adjustment mean that the pool of firms
which responds to any macroeconomic shock is unrepresentative, containing a disproportionately large number of firms from
industries with more flexible prices. Consequently, this group of firms is more likely to reverse any initial price change
after a shock has dissipated, making inflation persistence much harder to explain.

Policy papers

Abstract: This paper analyses Labour's record on monetary policy and the record of the MPC which it created. The paper begins by
discussing the conceptual framework and institutions behind inflation targeting as it operates in the UK. We then discuss
the successes that it enjoyed up to 2007 and debate the lessons that are being learned as a consequence of the experience
since then. We then raise some of the formidable challenges that UK monetary policy must now face up to including
maintaining the credibility of the inflation targeting regime in the face of greater interdependence between monetary
and fiscal policy, and between monetary policy and support to the banking system and financial markets.